wax (< 20)

May 2011

4

Medtronic, Inc. (NYSE: MDT) is a global leader in medical technology that helps to alleviate pain, restore health and extend life for millions of people.

The company was founded in 1949 and incorporated as a Minnesota corporation in 1957. Today the company serves physicians, clinicians and patients in more than 120 countries worldwide and functions in seven operating segments that manufacture and sell device-based medical therapies.

These operating segments are Cardiac Rhythm Disease Management, Spinal, CardioVascular, Neuromodulation, Diabetes, Surgical Technologies, and Physio-Control. The companies primary customers include hospitals, clinics, third party healthcare providers, distributors and other institutions, including governmental healthcare programs and group purchasing organizations.

Liquidity Both the company’s Current Ratio at 1.92, and Quick Ratio at 1.39, are below what we consider investment quality, while the company’s Cash Ratio at 0.74, slightly exceeds our investment quality threshold. Additionally, the company’s Goodwill and Intangibles comprise almost 40% of the company’s Total Assets, well above our 15% investment quality threshold.

Profitability The company’s FY10 Gross Margin was almost 82%, its Operating Margin was almost 33.5%, its Net Margin (NOPAT) was almost 28%, and its Return On Invested Capital was just short of 33%.

The company’s FY10 Effective Tax Rate was almost 22%, while for prior tax years its effective tax rate was 23% for FY08 and 23% for FY09. With an average effective corporate tax rate at between 28%-35%, we think a better understanding of the company’s effective tax results is warranted prior to considering the company for investment.

Debt The company increased its Total Debt during FY10, from $7.3 billion to $9.5 billion, an almost 30% increase. Not surprisingly, we believe the company’s debt level far exceeds its earnings capability and is gaining little for the additional debt management is adding to the company’s balance sheet.

We simply do not see FY11 earnings being much improved over FY10 earnings even though the company spent $620 million on acquisitions during FY10, not including providing an avenue for an additional spend of $150 million.

We see FY10 acquisition spending much the same as FY09 spending, a year in which the company spent approximately $1.25 billion during on acquisitions that lead to an increase in FY10 Total Debt of 30% and an increase in FY10 Earnings of 6%.

Cash The company ended FY10 with $1.4 billion in Cash and $2.375 in Marketable Securities, putting available Cash at $3.40 per share. In addition, the company had Operating Cash Flow for FY10 of $5.05 per share, a year over year increase of 2%, generated Free Cash Flow of $3.66 per share, a year over year increase of 2%, and increase their Annual Dividend by 9%, from $0.75 in FY09 to $0.82 in FY10.

Short-Term Investment The stock closed recently at $40.31, with first First Resistance at $40.66, a 1% increase from the recent close, Second Resistance at $43.33, 7% increase from the recent close, and First Support at $37.07, an 8% decline from a recent close, and Second Support at $30.80, 24% decline from the recent close.

With a Relative Strength Indicator near 40, we assumed the stock would be setting up for a jump in price. However the stock price seems to us to be vacillating, with no real movement up or down. Since we believe there is currently greater downward price volatility, we have no short-term interest in this stock at the present time.

Earnings Growth Investment Our earnings growth valuations are based on the spread between year over year earnings growth and the current PE.

In the case of Medtronic, Inc., the company had year over year earnings growth of 6%, ending FY10 with earnings of $3.99 per share. With a current PE of 10, the spread between earnings growth and the PE is about 0.6, meaning that for an investor focusing on earnings growth, a current fair value for the stock is about $43.00, a $2.39 increase from a recent close.

Long-Term ( 5 Year Hold) Investment Valuation Based on our review of the company’s latest annual financial information we think a Reasonable Value Estimate for the company is in the $43-$44 range. Assuming all due diligence was performed prior, we would set a Buy Target at about $26, a First Sell Target at about $51, and a Close Target at about $54.

In addition, based on our assessment of the company financial information that we reviewed, we believe a reasonable financial risk multiplier is 54. Accordingly, for the more risk averse value investor, we think a reasonable Buy Target is in the $14-$16 range.

Final Thoughts Considering a recent close of $40.31, the financial information that we reviewed, an estimated Merger and Acquisition payback of 9.3 years (assuming EBITDA remains the same), year over year earnings growth of 2%, as well as year over year free cash flow growth of 2%, we think the stock is currently fairly valued, and not a candidate for the Wax Ink Portfolio.

Wax

Disclaimer We have no position in Medtronic, Inc. and no plans to initiate a position in the next 72 hours. Additionally, we have received no compensation to write about a specific stock, sector, or theme. [more]

Recs

5

Aeropostale, Inc. (NYSE: ARO) is a primarily mall-based, specialty retailer of casual apparel and accessories, targeting 14 to 17 year-old young women and men through its Aéropostale stores and 7 to 12 year-old kids through its P.S. from Aéropostale stores.

The Aéropostale brand was established by R.H. Macy and Company, Inc., as a department store private label initiative, in the early 1980’s. Macy’s subsequently opened the first mall-based Aéropostale specialty store in 1987. Over the next decade, Macy’s, and then Federated Department Stores, Inc. (now Macy’s, Inc.), expanded Aéropostale to over 100 stores. In August 1998, Federated sold its specialty store division to Aéropostale management and Bear Stearns Merchant Banking. In May of 2002, Aéropostale management took the company public through an initial public offering and listed its common stock on the New York Stock Exchange.

The company maintains control over its proprietary brands by designing, sourcing, marketing and selling all of its own merchandise and its products can only be purchased in Aéropostale stores and online.The company operates 965 Aéropostale stores and 47 P.S. from Aéropostale stores. In addition, pursuant to a licensing agreement, one of the company's international licensees operated 10 Aéropostale stores in the United Arab Emirates. The company also recently announced a second licensing agreement which will allow the licensee to operated 25 stores in Singapore, Malaysia and Indonesia over the next five years.

Short-Term Investment Considerations The stock closed recently at $21.57, with first Resistance at $24.43, a 13% increase from the recent close, second Resistance at $24.59, 14% increase from the recent close, and final Resistance at $31.31, a 45% increase from a recent close. First Support for the stock settled at $20.50, a 5% decline from the recent close.

Long-Term (5 Year Hold) Investment Considerations In review of the company's latest annual financial information we note that the Current Ratio at 2.17, and the Cash Ratio at 1.23 were both what we consider investment quality. While close to where we like to see it, the Quick Ratio at 1.23 was not at what we consider investment quality levels. One very bright spot for the company was Return On Invested Capital at 94%. While down from FY10, given the very tough economic conditions retailers have faced over the past several years, we were pleased with this metric. We were also very pleased to see year over year growth in Free Cash Flow of 7%, and year over year earnings growth of 20%.

Earnings Growth Valuation We are value investors, attempting to determine the value of an entire company based on its most recent audited financial information. As such, we simply refuse to pay for earnings growth and make no inclusion of it in our valuation estimates. However, we have come to realize that many investors focus on earnings growth, basing investment decisions on the spread between year over year earnings growth and the current PE.

In the case of Aeropostale, Inc., the company had year over year earnings growth of 22%, ending FY11 with earnings of $3.06 per share. With a current PE of 7, the spread between earnings growth and the PE is about 3, meaning that for a value investor considering earnings growth, a fair value for the stock is about $31.00, if the stock were purchased at its recent close.

Finanical Statement Valuation Based on our review of the company's latest annual financial information we think a Reasonable Value Estimate for the company is in the $34-$35 range.

Assuming all due diligence was performed prior, we would set a Buy Target in the $20-$21 range, a First Sell Target in the $40-$41 range, and a Close Target in the $42-$43 range.

Based on our assessment of the company financial information that we reviewed, we believe a reasonable financial risk multiplier is 78. Accordingly, for the more risk averse value investor, we would set a Buy Target in the $16-$17 range.

Considering a recent close of $21.57, an estimated Merger and Acquisition payback of 4 years (assuming EBITDA remains the same), and Free Cash Flow of $2.61, we think the stock is currently undervalued, and a candidate for additional research for the Wax Ink Portfolio.

Wax

Disclaimer We have no position in Aeropostale, Inc. and no plans to initiate a position in the next 5 business days. Additionally, we have received no compensation to write about a specific stock, sector, or theme.[more]

Recs

4

Kraft Foods, Inc. (NYSE: KFT) is the world’s second largest food company. The company manufactures and markets packaged food products, including biscuits, confectionery, beverages, cheese, convenient meals and various packaged grocery products, selling to consumers in 170 countries. The company has operations in 75 countries, employing approximately 127,000 people, and operating 223 manufacturing and processing facilities.

Because the company is a holding company, their principal source of funds is from their subsidiaries, none of which are currently limited by long-term debt or other agreements in their ability to pay cash dividends or make other distributions with respect to their common stock.

Short-Term Investment The stock closed recently at $33.85, with first Resistance at $34.00, a 0% increase from the recent close, first Support at $32.05, a 5% decline from the recent close, and second Support at $31.14, an 8% decline from the recent close. Should the stock price fall through second support, the next support level is currently $27.49, 19% decline from a recent close.

Long-Term (5 Year Hold) Investment In review of the company's latest annual financial information we note that the Current Ratio at 1.04, the Quick Ratio at 0.58, and the Cash Ratio at 0.16, were all well short of what we consider investment quality. We also note that Total Debt at 4 times EBITDA and 2 times Net Fixed Assets, and Goodwill and Intangibles making up 67% of the company's Total Assets are additional metrics that were well below what we consider investment quality.

On the positive side, Return On Invested Capital at 21%, Free Cash Flow at $2.05 per share, an 18% year over year increase, and year over year Earnings Growth of 14% all exceeded our investment quality metrics.

Earnings Growth We are value investors, attempting to determine the value of an entire company based on its most recent audited financial information. As such, we simply refuse to pay for earnings growth and make no inclusion of it in our valuation estimates.

However, we realize that many investors focus on earnings growth, basing investment decisions on the spread between year over year earnings growth and the current PE.

In the case of Kraft Foods, Inc., the company had year over year earnings growth of 14%, ending FY10 with earnings of $2.38 per share. With a current PE of 14, the spread between earnings growth and the PE is about 1, meaning that for a value investor considering earnings growth, a fair value for the stock is about $36.00, if the stock were purchased at its recent close.

Valuations Based on our review of the company's latest annual financial information we think a Reasonable Value Estimate for the company is in the $28-$29 range.

Assuming all due diligence was performed prior, we would set a Buy Target in the $17 range, a First Sell Target in the $34 range, and a Close Target in the $35-$36 range.

Based on our assessment of the company financial information that we reviewed, we believe a reasonable financial risk multiplier is 72. Accordingly, for the more risk averse value investor, we would set a Buy Target in the $12-$13 range.

Considering a recent close of $33.85, an estimated Merger and Acquisition payback of 12 years (assuming EBITDA remains the same), and Free Cash Flow of $2.05, we think the stock is currently fairly valued, and a not a candidate for additional research for the Wax Ink Portfolio.

Wax

Disclaimer We have no position in Kraft Foods, Inc. and no plans to initiate a position in the next 5 business days. Additionally, we have received no compensation to write about a specific stock, sector, or theme. [more]

3

Bed Bath and Beyond, Inc. (Nasdaq: BBBY) and its subsidiaries, are a chain of retail stores, operating under the names Bed Bath and Beyond, Christmas Tree Shops, Harmon and Harmon Face Values, and buybuy BABY. In addition, the company is a partner in a joint venture which operates two stores in the Mexico City market under the name Home and More. [more]